Talking Points:
- If you intend to trade EURUSD or any Euro crosses, be mindful of the difficult fundamental landscape ahead
- Updates on the EU-US trade talks will start to cross the wires later today after Trump and Juncker/Malmstrom wrap up
- It is likely that the talks will end with uncertainty which would keep the market on edge ahead of Thursday's ECB decision
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Make No Mistake, Risk Trends Have Stretched Far Beyond 'Value'
It is a frequent contention of mine that capital markets - particularly US equity indices - have run far beyond the fair value supported by traditional measures such as growth or returns. Support for this indulgence has shifted over time. In the beginning of the decade-long climb from these risk-leaning assets, the advance was deserved recovery as the scourge of the Great Financial Crisis passed and investors recognized a field of opportunity. Yet, after so many years of advance and through a leveling out of economic growth to complement the market performance; the responsibility for progress increasingly shifted to the purview of unorthodox motivators. Central banks were a crucial piece of the puzzle that promoted stability and recovery, but their infusions into the financial system continued growing long after the recovery was under way and the pace of economic expansion started to flag. This prompted a 'moral hazard' that prioritized speculation. In more recent months, the central banks have maintained their presence in mass; but the slow withdrawal continues. Where this could draw attention to the imbalance in market prices and returns, we instead have found the appetite for yield hold fast - a fear of missing out (FOMO). Eventually though, this house of cards falls.
The Many Fundamental Themes Prodding the Bee's Hive
If market participants were to collectively evaluate the health and capacity of the global capital markets objectively, they would likely find few opportunities for liquid assets trading under their 'book value'. Yet, there is an interest to ignore these critical assessments in favor of maintaining a steady rise in capital gains to support a market starved for yield. That said, complacency will eventually give way to the conditions of excess, and that reckoning will arrive all the sooner depending on how what fundamental cues - or perhaps how man - prompt it. The sparks are currently in abundance across the global financial system. Growth forecasts have notably moderated and the effectiveness of programs designed to leverage the expansion have come up short. The Fed's rate hikes and the start of its balance sheet reduction have ushered in a normalization of life-giving stimulus, and now other central banks are starting to slowly follow in pursuit. The trade wars are perhaps the most pressing threat. While the US and EU paid lip service to optimism over their discussion Wednesday, the practical results were minimal. Meanwhile, the world's largest economy continue to promote discord and protectionism. One of these catalysts - or perhaps multiple acting in concern - will undermine our market's climb.
The Importance of the Metric: FAANG as a Leading 'Risk' Barometer
Eventually the fundamental flame will be put to the financial-scape, and 'risk trends' will collapse under the weight. While it would be best served to approach such a systemic theme with an abundance of caution by waiting absolute clarity that confidence was imploding, for many that would be intolerably too late to act. One means to monitoring the swells in speculative trends as they unfold is to look at favorites that are frequently used to set the level and pace of sentiment. There is no more comprehensive measure of 'risk on / risk off' than keeping close tabs on the correlation across the range of diverse but popular speculative assets. That said, in the hierarchy since the 2009 recovery began, US equities have proven one of the extraordinary outperformer. With this vast asset class, technology shares represent the best performance bar none. Further the largest market cap players make tracking convictions all the easier. The FAANG through this week, however, has reminded us that markets do not simply continue higher forever. Where Google's take home was clearly robust, the Amazon update after hours Thursday was not hefty enough nor influential enough to single handedly revive stretched convictions. Besides, Netflix and Facebook shares were more than painful to offset.
An Unsettled Backdrop for the Tech Giants and Apple Numbers Ahead
Last week, Netflix reported a disappointment in its quarterly update with user forecasts finding hefty revision. In terms of speculative standing, the Facebook shortfall Thursday evening was extreme by any standards. While the earnings fell short of expectations, revenues were still on pace - if wanting. Nevertheless, Google and Amazon's showings could be construed as beneficial, but whether they override fear from Facebooks' record breaking collapse (the biggest single day loss in capital terms on record at nearly $120 billion in value). What is interesting in the FANG / FAANG group is that it has been used as a speculative torch bearer for years. As the collection of Facebook, Amazon, Apple, Netflix and Google rose; we would see so many other sentiment-driven markets rise in pursuit. What happens though should this concentration of a risk primer fall apart? Will sentiment inevitability collapse or would complacency shift the focus elsewhere. Friday will be crucial to evaluating how Wednesday's epic Facebook collapse balances against the moderate improvement in Amazon figures. Further, next week, Apple is due to report its own numbers. This is singly the largest company in the world with a market cap that is close to the fabled $1 trillion objective.
